March 05, 2013

Regulation of SIFIs Highlighted at IIB Conference

During the Annual Washington Conference of the Institute of International Bankers, a number of government officials spoke on the various initiatives affecting systemically important financial institutions or “SIFIs”.

Cooperative Efforts

FDIC Chairman Martin Gruenberg said one of the key challenges in the aftermath of the financial crisis is developing the capability to manage the orderly resolution of a systemically important financial institution with extensive cross-border operations. Gruenberg noted that, as part of this effort, the FDIC and Bank of England have been working to develop contingency plans for the failure of Global SIFIs that have operations in the United States and the United Kingdom. Gruenberg said the U.S.-UK bilateral relationship is by far the most important with regard to global financial stability, and both countries have a strong mutual interest in ensuring that if an institution should fail it does not place taxpayers and the financial system at risk.

“Too Big to Fail” Challenge

Fed Governor Jerome Powell noted the effort underway to end too big to fail is “massive in scope” and holds “real promise,” but he added that it will take years to complete and “success is not assured.” Powell underscored that while current efforts to end too big to fail should be given time to work, there needs to be a thorough understanding of alternative, more intrusive reforms such as Glass-Steagall style activity limits, “in case the existing reform project falters.” Powell noted that the market today “still appears to provide a subsidy, of changing and uncertain amount, to very large banks to account for the possibility of a government bailout in the event of failure.” He stressed that the market needs to believe, “and it needs to be the case, that every private financial institution can fail and be resolved under our laws without imposing undue costs on society.”

Systemic Risk Vote

Finally, Treasury Undersecretary for Domestic Finance Mary Miller said the Financial Stability Oversight Council is in the final stages of evaluating an initial set of nonbank financial companies for potential designation as systemically important, and “our hope is that the Council will vote on designations in the next few months.” Miller noted the authority to designate firms as systemically important “is not a power the Council wields cavalierly,” adding that the FSOC evaluates the potential for companies to pose a threat based on a broad array of factors. “Careful assessments of these firms take time,” Miller emphasized, adding that over the last year the FSOC has reviewed public data, engaged with an initial set of companies to gather additional information and coordinated with regulators to develop thorough assessments.